LGIM sees slow swaps take-up

UK - Legal & General Investment Management says only a very few of its 2,000 UK pension fund clients have so far looked at swaps as a means of matching their liabilities.

LGIM economist Andrew Clare said that a "tiny proportion" of clients have even considered the instruments. He said the development of swaps for pension funds is at a very early stage.

He explained that the instruments can assist in matching scheme liabilities by swapping bond income flows. "It's not a panacea, it's not a cure-all.It's a tool to aid this shift to bonds."

Downsides included the complexity of having to agree guarantees with counterparties, Clare said. ""Some trustees may be put off by the complexity of these things. These really are quite nasty."

He added: "Trustees need to be comfortable with the use of derivatives."

And the timing for moving into swaps was not necessarily right at the moment, Clare added. He said the current state of the UK yield curve meant that long-duration bonds are expensive - due in part to the strength of demand from insurers and pension funds.

Swaps help to facilitate the shift to bonds - which is only viable if a scheme is in surplus, Clare commented. "Pension funds will hold back if they're getting the right advice," Clare said. He advised swaps "only if your scheme can bear the cost". Larger company schemes benefit because corporate treasurers are used to dealing with swaps, he said.

He said LGIM is lobbying the government's Debt Management Office to try to get it to issue longer-dated debt.